Thursday, May 8, 2008

The FSA discovers excessive concentration

If the UK slips into a systemic banking crisis, we won't be short of people to blame. Top of the list of guilty institutions will be the FSA. Since the FSA took control of financial sector regulation back in 1997, banks and building societies have run amok. At times, the FSA's lack of capacity and judgement reaches almost comical proportions.

The FSA's naivety was again on public display this week. Hector Sants, chief executive of the FSA,was guest speaker to the Building Societies Association's annual conference. He took the opportunity to "warn" his audience about the dangers of "excessive concentration in the buy to let market."

Over the last ten years, the number of buy to let mortgages has risen from a smidgen above zero to over one million. The time to warn about "excessive concentration" was about five years ago, just as the market was taking off and it became obvious that banks and building societies were taking on a potentially dangerous level of risk. Warning the building societies today, when they are struggling with liquidity and rapidly depreciating collateral is just a little too late.

His wisdom didn't stop at warning about "excessive" lending concentration in housing speculators. Saints also gave the building societies some advice on funding strategies. He took particular aim at building societies' over dependence on the wholesale market for funding liabilities. "If wholesale funding is being utilised, it should be in a proportionate manner and the overall funding model sensibly diversified. In particular, the wholesale component should be diversified in term and maturity."

Hello!!! Is there anyone in there? It is the FSA's job to ensure that the financial sector has appropriate liability management. The FSA should be monitoring key financial sector indicators like maturity structure, credit and default risk. When banks step out of line, it is the FSA's job to hammer them with fines.

The FSA isn't an advisory service for the financial sector. The FSA should regulate these institutions. It should protect the rest of society from dangerous risk taking by greedy banks, blinded by the profit motive. It needs to prevent banks from pushing out loans to individuals who have a high propensity to default. It needs to ensure that banks behave.

It is time to call a halt the FSA. Financial sector regulation should be returned to the Bank of England. Mr. Saints should be cut loose from the public sector and allowed to pursue a career more suited to his talents, which appears to be some kind of low level management consultant working within the retail banking sector. It is time we had a financial regulator that knew what it was doing.


  1. Ouch, did you get out of the wrong side of the bed? Poor Mr. Saints, you really went for him today.

  2. Why just rag on the FSA? What about the Bank of England and their interest rate policies.

  3. Go for it, Alice. We're mad as hell and we just won't take it anymore!

  4. Not sure about giving it back to the Bank of England. I would prefer a wholesale clean out of the top management and a new tougher regime.

  5. Alice, I think that this is one of your most perceptive blog entries.

    The FSA is definitely at the heart of the matter... though, while I feel Hector Sants is a slimy opportunist, I don't think he alone can shoulder responsibility. He joined the FSA from Credit Suisse in 2004 and only became 'Chief Exective' in July 2007 as John Tiner scarpered just before Northern Rock imploded.

    A staggering claim I read in a dead-tree newspaper some weeks ago was that half the staff at the FSA intend to resign within a year. Maybe this partly explains why bonuses are as high for a year of chronic failure as in a year of relative success.

    I was struck by this:

    "The authority said four out of five staff closely involved in work on Northern Rock had left."

    Other reports show that no-one was fired... so, this begs the question... what are these ex-FSA employees doing today? Have they taken up lucrative roles within the financial services industry to capitalise on their inside-knowledge about just what firms can get away with?

  6. P.S. Anonymous... The BoE only implements government polices with respect to interest rates. The BoE's targets are entirely out of their control.

  7. asteve,

    A while back, I read the FSA mea culpa report on Northern Rock. It is a shocker. My favourite failing was that NRK was supervised by people who worked on insurance supervision.


  8. You should post a link to the report... :)

  9. asteve

    At the time, I did a post about the FSA report on NRK:

    Still looking for the link. It is on the FSA website somewhere.


  10. Interesting old blog post... I can see we agree that the FSA has been a disaster and that the BoE is in a far better position to do the job properly.

    I was reading in the (dead tree) Times yesterday that Saints is arguing that only one institution should be able to "pull the trigger" on a bank. I think he thought he was making the case for it being him... I hope he shoots himself in the foot.

    What I find so surprising is the level of political spin put to suggest that the FSA, while it made mistakes, was not to blame. To me it seems astonishing that political venom seems to be directed at the BoE - when it was clearly a problem of two parts... on one hand, the Treasury is to blame for insisting on lax monetary policies (by way of symmetric inflation targets) and, on the other hand, the FSA are responsible for failing to regulate to mitigate the operational risks arising from poor treasury decisions.

  11. Um, the problem isn't the structure, principles or mandate of the FSA. It's that the scumbags at the top of the organisation didn't do their jobs.

    It's still a great idea to have a single financial regulator, principles-based regulation, and to seperate them from the people who print the money.

    Remember the principle of checks and balances to prevent power concentrating in a single entity.

    BUT........ They should actually DO THEIR JOB. That's the problem. Clear out the management and start again.


  12. It's a bit of a tangent, but I'd like to add some support for the BoE here.

    Not only do they work to government set inflation targets, but the government also tells them what measure of inflation to use. Gordon Brown moved them from RPI to the CPI (which has consistently measured inflation as being lower for years).

    Neither index really registers the affect of bubbles in individual assets (even one as widely held by the public as residential property), but at least the RPI would have kept interest rates somewhat higher and helped dampen this bubble.

  13. Mervyn King said something I found very surprising about RPI and CPI...

    I'd been thinking about the different methodologies for the two metrics and how CPI would be lower - even if they used the same weights and prices... so this was quite a surprise to me.

    King said that while CPI has been lower than RPI for a considerable time, it is possible that they could cross in future... and wage negotiators might want to think hard before deciding to insist on RPI linking.

    My reporting is poor - but my impression was that King was just pointing out something technical about CPI and RPI. Essentially, I think, he's saying that biflation would keep CPI relatively high, while RPI (which includes more housing related costs) might fall dramatically.

  14. Alice has written a splendidly clear post on this above.

    If the RPI is likely to fall because it will register lowered housing costs, I'd still rather it be used because it sounds like it would've done a better job of preventing this bubble and future bubbles.

    And as Alice notes above, RPI also measures several other fundamental costs for ordinary consumers that the current figures ignore.

  15. Powerman,

    Thanks for the kind words.

    Your earlier comments gave me the idea for the post.